Amazon reported results for the first quarter of 2016. Since the first quarter of 2015, Amazon has been reporting the individual results of Amazon Web Services (AWS). Based on Q1 2016 figures, AWS is now a $10 billion run-rate revenue business with a trailing twelve month operating income of nearly $2 billion.
The reported revenue for AWS consists of the more than 70 services now offered from the AWS platform including the sales of compute, storage, and database. Amazon does not specifically address how much AWS revenue was attributable to the media industry. However, the AWS figures are an informative data point for better understanding the broader adoption of cloud services.
For the three months ended March 31, 2016 AWS had revenue of $2.6 billion, a 64% increase over the first quarter of 2015. AWS represented 8% of Amazon’s sales for the quarter, an increase from the 6% contribution for Q1 2015.
AWS operating income for Q1 2016 was $604 million, which was a 210% year-over-year increase versus the first quarter in 2015. During the quarter AWS actually generated more operating income than all of Amazon’s other business lines – both on an individual and aggregate basis.
Operating margins for AWS in the quarter were 23.5%, a substantial increase over the 12.4% operating margins during Q1 2015. The reporting of operating income now includes a burden for stock-based compensation (this lowered operating margins versus historical reporting).
Management attributed the growth in AWS revenue and profitability to increased customer usage and cost structure productivity. This was partially offset by continued pricing decreases and increased spending on technology infrastructure.
The below chart from Amazon’s Q1 2016 earnings presentation illustrates the growth of revenue and operating income for AWS over the past year.
Operating incomes doesn’t capture the cash flow impact of capital expenditures and payments attributable to the financing of equipment for AWS, which is not disclosed directly. It is a capital intensive business.
Additional information from Amazon’s filings are illustrative of the significant level of investment in technology infrastructure attributed to AWS. The Company’s total capital expenditures (cash) were $1.2 billion in Q1 2016, a 38% increase over Q1 2015. According to Amazon’s SEC filings, “This primarily reflects additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS) and additional capacity to support our fulfillment operations.”
Cash capital expenditures do not account for property and equipment acquired under capital lease obligation (non-balance sheet items). Property and equipment acquired under capital leases were $875 million in Q1 2016, an 8% decrease over Q1 2015. A majority of this spend is due to investments in technology infrastructure for AWS.
On Amazon’s call with earnings analyst, Brian Olsavsky, SVP and Chief Financial Officer, stated the combined total of capital expenditures and capital lease obligations was $9.5 billion in the trailing 12 month period. AWS is the largest driver of this spend, but does not consume all of this number
AWS specifically and cloud vendors more broadly, are benefiting from a secular trend toward cloud usage among media and entertainment sector. As cloud providers replace the capital expenditures of media customers, there are significant implications for technology vendors and service providers. The $9.5 billion figure (noted above) is equivalent to almost half of all annual product sales in the media and broadcast technology sector based on the latest results of the IABM DC Global Market Valuation Report (www.iabmdc.com).
The adoption of cloud infrastructure in the media industry is not necessarily a negative development for the technology vendor community. AWS views its services as unburdening organizations from the undifferentiated heavy lifting of technology deployments. In this way, AWS is allowing media customers and media technology suppliers to focus on the aspects of their businesses differentiating their products and services to customers.
Moving to cloud infrastructure does necessarily require new technology architectures, revenue models, and operating structures. These topics were discussed extensively during the recent Media Technology Business Summit at the 2016 NAB Show including a keynote from AWS titled, “’All In’: Cloud Transformation of the Media Industry.” If you haven’t downloaded our slides from the event, a complimentary copy is available from the following link.
While Amazon does not disclose specific AWS numbers in the media vertical, Amazon founder Jeff Bezos did note a high-profile media customer in his annual letter to shareholders (excerpt below).
“MLB Advanced Media is an example of an AWS customer that is constantly reinventing the customer experience. MLB’s Statcast tracking technology is a new feature for baseball fans that measures the position of each player, the baserunners, and the ball as they move during every play on the field, giving viewers on any screen access to empirical data that answers age-old questions like ‘what could have happened if…’ while also bringing new questions to life. Turning baseball into rocket science, Statcast uses a missile radar system to measure every pitched ball’s movements more than 2,000 times per second, streams and collects data in real-time through Amazon Kinesis (our service for processing real-time streaming data), stores the data on Amazon S3, and then performs analytics in Amazon EC2. The suite of services will generate nearly 7 TB of raw statistical data per game and up to 17 PB per season, shedding quantitative light on age-old, but never verified, baseball pearls of wisdom like ‘never slide into first.’”
Presentation: Q1 2016 Amazon Earnings Presentation
Press Release: Q1 2016 Amazon Earnings Press Release
SEC Filing: Q1 2016 Amazon SEC Filing
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